More on Land-Use Regulation and Housing Prices, Plus News From Seattle
by Brendon Carr
On the Marmot’s Hole today guest blogger R. Elgin noted a recent press report about another theme park to be constructed near Seoul. A commenter “frederick” opined rather predictably:
This is sickening. Land is sparse in Korea. Korea doesn’t need any more theme parks that will only use up valuable land space.
But actually, despite the population density in Korea, land is actually not so sparse as people imagine. The problem Korea has is too many restrictions on what purposes to which the existing owners can put land. There are rather unrealistic building-height, setback, and density rules applicable in the city center (why, again, are Korean apartment blocks usually 12-19 storeys when Hong Kong apartment blocks are so often 30-50 storeys?), especially in the Central Business District—while fringe areas are often designated “greenbelt” or “agricultural” use, prohibiting development for productive uses.
We have a combination of actual shortage and artificial shortage imposed by the government. Not enough developable land is the problem. Want to improve the lives of the people and control housing price increases? Deregulate, baby.
The good news is, the Bulldozer has already publicly stated the correct view on these issues. Assuming he can bulldoze a real deregulatory scheme through the National Assembly (somehow, I expect this new “business-friendly” crew still has the usual unhealthy proportion of rent-seekers, and so the deregulation may be less dramatic than hoped-for), we will see a wave of better buildings in Seoul and possibly the increase in housing prices will be moderated.
As a homeowner, however, I surely do not want them to come down.
This problem is not unique to Korea. It’s found all over the world, really. I get a semi-regular e-mail blast from Demographia’s Hugh Pavletich in New Zealand, and he describes the house-price bubble unaffordability crisis in Australia and New Zealand being driven by their land-use policies as well. Demographia publishes an annual survey of house-price affordability in the English-speaking world (where the data is, I guess, more accessible and based on comparable standards)—the 2008 Survey is available now (thanks to Hugh for the news and for his sponsorship of the survey).
Los Angeles stands out as the most unaffordable market Demographia surveyed. Seattle, where I went to law school, appears headed the same way. The Seattle Post-Intelligencer reported recently on how nearly all of the Seattle house-price increase of the last 20 years has been driven by land-use policy. I’m posting a heavily-edited version of the piece here, because it’s long (the original is worth a read if you’re interested):
An intriguing new analysis by a University of Washington economics professor argues that home prices have, perhaps inadvertently, been driven up $200,000 by good intentions.
Between 1989 and 2006, the median inflation-adjusted price of a Seattle house rose from $221,000 to $447,800. Fully $200,000 of that increase was the result of land-use regulations, says Theo Eicher — twice the financial impact that regulation has had on other major U.S. cities.
Long building-permit approval times and municipal land-use restrictions upheld by courts also have played significant roles in increasing Seattle’s housing costs, he adds.
Eicher’s $200,000 conclusion doesn’t surprise Kriss Sjoblom, staff economist for the Washington Research Council, a nonpartisan organization that examines public-policy issues.
“It’s actually pleasing,” Sjoblom says, “that we finally have data that allows us to show things we thought were there all the time.”
Compared with 250 major U.S. cities, he says, Seattle:
• Is first in terms of the impact of state political involvement in land issues.
• Is in the top 3 percent for approval delays for new construction.
• Is in the top 10 percent in local political pressure influencing land use.
“The state is intervening to restrict supply. It’s not that there’s no land at all,” Eicher says.
Economists hold that housing costs are driven by supply and demand, and say those factors have certainly influenced the cost of Seattle’s housing.
But Eicher argues that “demand does not need to drive up housing prices.”
Cities such as Houston and Atlanta, which have few growth restrictions, have shown that. They’ve been able to add enough housing to meet demand, so their home prices have risen more moderately than heavily regulated San Francisco and Boston, which have a harder time increasing housing.
Last summer, King County’s potential first-time buyers earning the median family income ($75,143) had just 37 percent of the financial wherewithal to buy the median-priced single-family house ($477,000) at the prevailing interest rate (6.47 percent).
Five years earlier, when King County’s median-priced house cost $282,500, median-income, first-time buyers possessed 72 percent of the income needed.
But various government regulations make it challenging to add more affordable housing, notes Sam Anderson. He’s executive officer of the Master Builders Association of King & Snohomish Counties, which has pushed government to rethink some of the regulations.
Anderson estimates that regulatory costs comprise up to 30 percent of the total cost of building a new house (land costs included). The laundry list of fees and requirements can run to 30 or more, depending on where the house is built.
Among them, Anderson says, are transportation, school and park impact fees, stormwater management fees, critical-areas mitigation and monitoring, pavement requirements and rockery permits.
And then there’s the dollar cost of the process itself.
Building in Seattle can be very time-consuming compared with nearby cities, because of Seattle’s neighborhood-based design-review process, says Linda Stalzer, project development director for the Dwelling Company, an Eastside homebuilder.
In the final analysis, Eicher believes Seattle’s regulatory climate exists because its residents want it. “My sense is land-use restrictions are imposed to generate socially desirable outcomes,” he says. “We all love parks and green spaces. But we must also be informed about the costs. It’s very easy to vote for a park if you think the cost is free.”
The Korean equivalent of the “parks and green spaces” is concrete poured all over the city (i.e., no parks) but make-believe farmland preserved in seemingly-rustic “greenbelt” land within the city limits of Seoul and all around in Kyeonggi Province. This farmland is not very productive, and its green space remains off limits both to developers and to people who might want to tramp through verdant green fields. So what is accomplished by the land-use restrictions?
The theme park, at least, gives people some respite from their homes.
UPDATE 2/17: Prof. Eicher has kindly given permission for me to link to his original paper (PDF) which was the basis of the Seattle P-I story. Like the Demographia Survey, the paper is well worth your time.
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